Pro-inflation arguments are myriad and it’s true we’ve prattled on a bit. The thing is once it gets going inflation is usually like a runaway train nearly impossible to control.
So yes, we’re devoting some energy to the topic, although our concerns regarding serious inflation are for the longer 2023+ time-horizon.* Yes, year-on-year inflation looks high right now. However, this is mostly attributable to the “base effect.” Year-on-year comparisons show higher-than-average inflation because one year ago the economy was in a steep Covid-caused decline with prices in free-fall last spring.
Fed Chair Powell has assuaged markets the current inflation readings relate to this “base effect” anomaly - having more to with math than worrisome real prices increases. We concur.
That said, looking out two or three years, one pro-inflation argument we’re mulling over - and one you don’t generally hear much about - relates to oligopolies. (Yes, you read that correctly.)
Oligopolies could be described as monopolies with frenemies. A monopoly is when a single company dominates an industry – such as Standard Oil circa 1910.
An oligopoly, however, is when there are a few companies ruling a given industry. Like monopolies, oligopolies are well positioned to set prices – encouraging price inflation as well as excess profit-taking.
And compared to straight-up monopolies, oligopolies can be hard to prove, hard to regulate and hard to break-up.
Oligopolies tend to get stronger and bigger, slaying competition as they 1) have access to excess capital because they charge near-monopolistic prices and 2) can buy up potential competitors (except of course the other one or two they let stand to prove they are not a monopoly).
The main sectors with oligopolistic tendencies include all kinds of technology, the media, and even - - domestic US airlines.
Here's some examples of possible modern oligopolies. I'm sure you'll get the drift:
Apple iOS and Google Android dominating smart phone operating systems
Apple and Microsoft Windows dominating computer operating systems
Google, Facebook and Amazon dominating the Internet
T-Mobile, Sprint, Verizon and AT&T dominating cellphone service
Comcast and… (ok, Comcast might be a straight-up monopoly)
Netflix, Hulu, Disney and Amazon dominating streaming
Delta, United and American dominating US air travel
This last airline example is probably the weaker oligopoly argument as there’s Frontier, Southwest, JetBlue and (yikes) Spirit. Some of these smaller birds may not make it through the Covid travel ixnay (but so far so ok).
There are also oligopolies in lesser-known industries such as construction materials and home-building.
We're looking at whether oligopolistic tendencies are significant enough to stoke inflation.
And perhaps, as importantly, we're looking at whether investing in oligopolies is worthwhile.
* The best “there won’t be inflation” claim is all about cheapening and ever advancing technology. As computers and robots continue to outperform humans at more and more tasks, everything gets cheaper. We’ll address this good argument in an upcoming Insight.
